Trader Mike commented on a recent blog of mine with, “The other day when I linked to the SMB Capital DNDN post, I wondered why anybody would knowingly be involved in that stock ahead of news.” We enjoy Trader Mike’s blog so I promised Mike a response. Also, Adam at Daily Options Report, offered interesting commentary on this play. This move in DNDN happened well before the news was supposed to be announced as we will demonstrate. Basically I just caught a bad break.

First, let me say that I agree with Trader Mike. A trader, including a short term trader, should not hold a biotech when news is about to hit. In fact we teach our desk to be flat before the Fed. We instruct our traders to get flat oil stocks before the oil number. Today our guys got flat before the Housing number. We do not trade stocks during a conference call unless we are listening. Our new traders are forbidden to trade stocks that are about to report into the Close. This is just gambling for the intraday trader. And Trader Mike offers excellent advice for the developing trader.

But I was not holding DNDN with news about to be released. It was 1:25PM EST and the news was not to be released until 2PM EST (as you can see from briefing.com below). I am still not sure what happened, but all of sudden DNDN dropped 15 points, was halted, and then during the halt the news was released. This was not supposed to happen. It was 35 minutes before the news was to be released. I certainly would have been flat 15 minutes before news was gonna hit. Sometimes news is released a little early so it wise to be safe and exit 15 minutes before an expected announcement. But DNDN was still in an intraday uptrend. 24.43 offered strong intraday support. And DNDN was trading like it had another upmove above 25 in it.

Recently our firm started using a different news feed. On our trading floor we use a squawk service. Breaking news is announced by an experienced market veteran which is piped onto our trading floor. The day before the DNDN disaster our new squawk guy kept chirping that DNDN was to report news at 3:20PM EST. And then around this time he chirped that the news was not until tomorrow. Our traders enjoyed mocking the new guy for his error (I am sure he will get better).

Sometimes in trading you just get screwed. Sometimes strange stuff happens. That is why I offered the self-critique that I did not hit out of DNDN fast enough. You must always live to play another day. When the price action indicates a stock is weak then you exit, gather information, and reevaluate. You do not hold stocks where the price actions screams, “Sell!” The second that DNDN ticked below 24 I should have hit the bids. The second DNDN ticked below 24 it was screaming,”Sell!” I gave it just a little room to trade below 23.75. This was a mistake. Below 23.75 there were no prints for me until 21.80ish. Ripper.

There are certain biotechs that are too risky. A biotech stocks that is too steep on the charts, I avoid. Any stock with a short interest above 30 percent is a pass for me. A biotech stock that moves from 4 to 30 with no fundamental news, is one I trade with extreme caution or skip. If such a stock even ticks against me I am out. With these stocks I trade strictly on momentum.

I hit DNDN for a loss of 7.5k. I made back some money after it reopened and ended the day down less than 2k. This is not the end of the world. This did not ruin my month. I lived to play another day.

Briefing Story:
28-Apr-09 10:31 ET In Play: CNBC guest discusses this afternoon’s DNDN data (22.50 +0.94) -Update : CNBC guest from Biotech Stock Research discusses the DNDN median survival number, noting a number around the 3-month added survival would be great, and anything over 4 months of added survival would be a homerun. (Data is expected to be discussed at 2:00 ET)

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